United Capital at crossroads: Fintech innovator? Or aging RIA aggregator?

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Even in an industry dominated by strong personalities, United Capital CEO Joe Duran stands out.

A ubiquitous presence in the media and at conferences, the wiry 51-year-old with close-cropped brown hair, an intense gaze and trademark black-rim glasses preaches a gospel of “financial life management” with messianic zeal.

While many consider Duran a master salesman and showman, others see him as hyperbolic egoist. He is seen as an industry pioneer, thought leader and charismatic corporate chief, but also as a polarizing figure who can turn people off as well as on.

As Duran seeks new financial backers, he faces the greatest sales pitch of his career: Persuading investors that his 14-year old company is not only an RIA powerhouse with assets under management of $21 billion, but also a forward-looking fintech developer that has concocted a secret software sauce that will revolutionize financial planning and the way advisors interact with clients.

“It’s like they’re facing a midlife crisis or an identity crisis,” says Aite Group analyst Alois Pirker. “What does United want to be when it grows up?”
Duran’s own backstory is already the stuff of industry legend. He grew up in Zimbabwe, ran away from an abusive father and made his way to the United States. After college, he got a job with a firm that monitored asset management accounts for independent advisors.

Within five years Duran became president, the company changed its name to Centurion Capital Management and Duran helped sell it for around $100 million by the time he was 34.

Four years later, in 2005, he founded United Capital Financial Advisers, one of the industry’s earliest aggregators. The firm now has over 600 employees in 92 offices across 29 states and generates, according to Duran, around $230 million in revenue.

In 2016, United Capital launched its online platform FinLife. The core of the platform is based on behavioral finance principles that use a gamelike series of questions to tease out clients’ goals, fears and aspirations. The product was the culmination of Duran’s conviction that the future of the industry rests on connecting with clients who want “guidance and advice about their entire financial life, not just their money.”

“If you are trafficking in information and interacting with end consumers, you must be a tech company,” Duran says. “It’s not even a choice."

Now Duran finds himself at a crossroads — one that is emblematic of the rapidly changing financial advisory business overall. Should United and, indeed, all RIAs, redefine themselves as technology companies?

“If you are trafficking in information and interacting with end consumers, you must be a tech company,” he says. “It’s not even a choice. It’s why J.C. Penney is a failure and Walmart is doing fine. They realized, ‘We are not a brick-and-mortar store; we must be bionic.’ “

But funding software development, upgrades, sales, service and training is expensive. United has already spent nearly $30 million on FinLife, Duran says.

In addition to paying for expensive technology, United also needs to fund its inorganic growth through mergers and acquisitions as valuations rise and deep-pocketed buyers snap up available properties.

Soliciting investors to fund FinLife and other initiatives is the logical next step, Duran says. He is seeking a large infusion to fund his template for United’s expansion and metamorphosis.

Ideally, a friendly investor will take a big stake in United, “cut a check for hundreds of millions of dollars, and say, ‘Keep on doing what you’re doing and let us help you do it quicker,’ ” Duran says.

The fate of United will depend on how Duran himself, together with the fintech and RIA businesses, are evaluated.

A worst case scenario? If potential investors perform due diligence and find themselves disappointed, the company could “break up from within,” warns Mercer Advisors Vice Chairman Dave Barton.

United may command a robust valuation of 12 to 16 times EBITDA, industry sources say. But even if it does, a new majority shareholder may decide its assets and distribution channel are more valuable than Duran’s vision for future fintech growth and curtail his autonomy or carry on without him.

The outcome — and the fate of United — will depend on how Duran himself, together with the fintech and RIA businesses, are evaluated.

To be sure, there is a wide consensus that Duran has been a dynamic executive who has not only created a successful enterprise, but been an industry innovator.

“United has been able to create a consistent client experience through very effective standardization across the company,” says Mark Tibergien, CEO of BNY Mellon Pershing Advisor Solutions. “The idea behind FinLife resonates as a concept. I agree with Joe — the industry has evolved from investment centric to planning centric. And he’s done a masterful job of proselytizing to the industry.”

Potential buyers will be attracted by that kind of star power, Pirker says. “He’s well-known and widely respected,” he says. “When it comes to intellectual property, and how a large RIA model can work and be scaled, I can see buyers being interested in that.”

But Duran’s forceful nature may not be the right fit for every investor. “Private equity tends to like strong personalities,” says Mark Casady, chairman of fintech financing firm Vestigo Ventures and a former CEO of LPL Financial. “They will have a leader in place who will be able to do things right away. But a strategic partner may have questions about whether that kind of a personality will fit in as part of a team.”

Duran is often compared to other outsized and publicity-savvy industry executives like Ric Edelman, who last year merged his firm with Financial Engines to form a $200 billion RIA.

Another is Ron Carson, CEO of Carson Group Holdings. Carson, like United, sells a product — practice management training, in Carson’s case — to advisors outside its own network.

“Joe is both United’s greatest asset and its biggest hindrance,” says a former company executive.

“Joe is very similar to Ron Carson,” says Eric Clarke, CEO of Orion Advisor Services, a tech company that partners with United on FinLife. “They are the same type of industry luminaries and role models. But to work with them, you have to drink the Kool-Aid.”

One former United sales executive, who did not want to be identified, summed up the dichotomy succinctly: “Joe is both United’s greatest asset and its biggest hindrance.”

Duran is passionate about FinLife CX, the latest iteration of United’s fintech platform. It “applies behavioral economics to the client interaction process,” he notes, adding that it is the cornerstone of his vision of United as a company that “manages lives, not money.”

FinLife CX also enables advisors to track clients and keep in touch with them, and includes practice management training and an investment management feature.
The first version of the product, FinLife OS, was built on top of Salesforce, but the CX version can be integrated into other CRMs, including Junxure and Redtail, as well as portfolio accounting systems.

FinLife is used by United advisors and is also licensed by other RIAs who join FinLife Partners and license the technology as a white label.

United Capital charges firms $600 annually for each client who uses the software, plus installation and maintenance fees. Training is required and is done through videos and live coaches.

Over 6,300 clients use FinLife, working with more than 125 advisors at 38 RIAs firms that have signed on with FinLife Partners, Duran says.

Duran believes FinLife can function as an turnkey asset management platform in time, and leverage its scale and investment management platform to challenge such industry stalwarts as Loring Ward and AssetMark on price.

Fintech businesses generally command a higher valuation multiple than RIAs, and “fintech companies remain priced at a premium to the broader markets,” according to the most recent Mercer Capital report on the industry.

“It’s important to build a platform and FinLife has done a lot of cool stuff,” says Savant CEO Brent Brodeski . “I’m just not sure I’d build a business around it."

A start-up like FinLife could be valued at around six to seven times revenue, industry observers estimate.

“Everybody in the space would prefer to be looked at as a fintech,” says Joel Bruckenstein, a tech consultant for advisory firms and the producer of the Technology Tools for Today conferences.

Rebutting critics, Duran denies that he’s seeking a fintech valuation. “I hope people will be looking at this as two businesses,” he says. “There’s a core distribution business, which is easy to value and is growing geometrically, and a fintech side, which is growing exponentially.”

So how will those businesses be evaluated?

“It’s important to build a platform and FinLife has done a lot of cool stuff,” says Brent Brodeski, CEO of Rockford, Illinois-based Savant Capital. “I’m just not sure I’d build a business around it.”

Another Midwestern RIA owner, however, says FinLife is just what his firm needed. “United Capital can do [the software] better than we can,” says John Lame, CEO of Lenox Wealth Management in Cincinnati. “We’ve had better discussion with clients using FinLife, and we haven’t found anyone else as focused on the client experience.”

While Lame was willing to change his way of doing things, many advisors are far more reluctant, industry observers say. “Joe has created a new category,” says business partner Eric Clarke, CEO of Orion Advisor Services, “but he has to convince advisors to change their behavior and how they communicate with clients. That’s not easy.”

In addition, FinLife is hardly the only option for advisors looking at behavior-oriented planning tools, says technology consultant and CFP Bill Winterberg. “FinLife has good data collection, standardization and risk style,” he says. “And I like its feature for identifying client motivations, its client portal and the investment management features. But is it unique? No.”

The program may also be vulnerable to being replicated by a competitor, Bruckenstein says. “United was early to the game, but behavioral is a wide topic and there are different ways to gamify it,” he says. “You could argue there will be competition if firms think there is enough demand for this kind of product.”

If investors believe FinLife is “the next big thing,” he adds, “United could raise a lot of money. But looking at the numbers, it’s a small sample size so far.”
Starting a new tech business is hard enough. Unfortunately for United, its core business model — mergers and acquisitions — hasn’t exactly been a source of comfort recently.

The company’s initial growth came by buying up 69 firms around the country since 2005, usually with assets between $200 million and $1 billion.

But the firm’s buying activity has slowed dramatically in the past few years, and United made only three acquisitions in 2018, in contrast with competitor Mercer Advisors, which bought nine firms last year.

Duran admits United was “outpriced” on a number of deals but insists United is not capital constrained, with $35 million on hand in cash and $30 million in debt. To become more competitive, he says, the firm will draw on a $50 million line of credit from SunTrust Bank to make acquisitions this year.

Even with more capital, United faces challenges. While Mercer Capital’s Barton, who heads the company’s M&A division, calls United a “formidable competitor,” he notes its drop-off in deal volume.
“The common refrain I hear from firms who don’t go with United Capital is that they are very rigid in their approach,” he says. “Joe is a strong leader, but doesn’t deviate from his vision. It feels like a closed shop, and that rubs people the wrong way.”

Lack of control over investment management is particularly hard for many advisors to accept, says Louis Diamond, executive vice president of Diamond Consultants, a financial advisory search firm.

“United’s regimented process is too restrictive for advisors who like to do their own asset management,” Diamond says. “Their tech, branding and scale can be attractive for some, but it’s definitely not everyone’s cup of tea.”

“One of the first things any investor will look at is an advisory firm’s organic growth rate,” says Dennis Dolego, senior research director at Optima Group. “The problem is those growth rates are hard to determine, and you can’t verify them.”

But Duran makes no apologies. Benefiting from United’s scale, expertise and technology, sellers’ businesses have grown substantially, he asserts. “But the advisor has to be willing to cede control,” he affirms.

The firm’s ultimate fate may rest on key business performance metrics. “One of the first things any investor will look at is an advisory firm’s organic growth rate — the net new assets that are added,” says Dennis Dolego, senior research director at Optima Group. “The problem is those growth rates are hard to determine, and you can’t verify them.”

According to the latest Fidelity RIA Benchmarking Study, the median AUM growth rate for advisory firms was 17.5% in 2017, including market appreciation and M&A activity. The mean net organic growth rate, excluding market performance, was 10.2%.

United’s net new asset growth has been around 10% to 12%, for the last few years, including market appreciation, and about 5% to 6% without, a spokesman for the firm says.

The median revenue increase for RIAs with over $2.5 billion in AUM from 2013 to 2017 was 9.5%, according to Charles Schwab’s 2018 Benchmarking Study. Revenue growth for United has been “greater than 20% for the past several years,” according to a spokesman.

With close to 100 locations, United has more offices around the country than almost any other RIA, but about half are outside the country’s top 20 metropolitan areas.

“Somebody who is evaluating the firm will want to know where their resources are concentrated and if they have true dominance in key markets,” says Pershing’s Tibergien. “Are they fighting an offensive war, or do they have a Maginot Line?”

Potential investors will also look at performance metrics like client and advisor demographics, cash flow, pricing, profit margin, decumulation, the number of small accounts and average assets per client.

United has been profitable since 2010, according to Duran, and has a 25% profit margin “after everything” on its $230 million in revenues.

The firm has been able to command premium pricing of 92 basis points in fees, he says, sometimes charging as much as 1.6% of a client’s assets under management for extensive planning and portfolio services.
The average account size at United is $328,251, according to the firm’s latest SEC Form ADV. A United spokesman said the average account size per household was over $1 million.

Considering the next steps, the question is whether an investor is satisfied with what’s already in place or is betting on what is to come.

“The ideal buyer has to buy Joe’s vision of the future,” Brodeski says. “And I think his vision is the right one. But it’s not where his company is now.”

Wrong, says Duran.

“If I raised money under that premise, I would be toast,” Duran says. “There’s no one who will buy into my dreams. But the evidence is here today that you’re not buying into this dream. You’re buying into a good business.”

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RIAs M&A Strategic buyers Fintech Private equity fundraising Joe Duran Ron Carson United Capital Mercer Advisors